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A History Of The Billable Hour

It's been said that law firms and lawyers should change the way that they charge clients -- moving away from the billable hour to a flat rate or other system.

From a NYTimes article, here is an interesting history of the billable hour:
"The notion of charging by units of time was popularized in the 1950s, when the American Bar Association was becoming alarmed that the income of lawyers was falling precipitously behind that of doctors (and, worse, dentists). The A.B.A. published an influential pamphlet, “The 1958 Lawyer and His 1938 Dollar,” which suggested that the industry should eschew fixed-rate fees and replicate the profitable efficiencies of mass-production manufacturing. Factories sold widgets, the idea went, and so lawyers should sell their services in simple, easy-to-manage units. The A.B.A. suggested a unit of time — the hour — which would allow a well-run firm to oversee its staff’s productivity as mechanically as a conveyor belt managed its throughput. This led to generations of junior associates working through the night in hopes of making partner and abusing the next crop. It was adopted by countless other service professionals, including accountants."

While the article focuses on accountants, it offers insight into the issues surrounding the billable hour for attorneys, as well. After the 2008 collapse, the legal market suffered a huge hit, and that's when law firms really started to rethink the notion of charging by the hour. "Clients have complained for years that the practice of billing for each hour worked can encourage law firms to prolong a client’s problem rather than solve it. But the rough economic climate is making clients more demanding, leading many law firms to rethink their business model."

So what's the alternative? "Instead of paying for hours worked, more clients are paying Cravath flat fees for handling transactions and success fees for positive outcomes, as well as payments for meeting other benchmarks."

One Manhattan law firms utilizes a model where they charge clients some kind of monthly retainer, which gets credited against an eventual recovery.

But most firms still haven't moved away from the billable hour, and law firms are running out of hours that they can bill in a year to turn a profit. “Firms are approaching the limit of how hard they can ask lawyers to work. Without alternative billing schemes, lawyers will not be able to maintain the rapid escalation in incomes that big firms have seen.”

As one commenter noted, "[t]he difficulty is, we don’t really know what it costs us to do something." It's risky to provide an alternative measure of compensation because if an attorney estimates too low, then they risk losing money.

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